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Non-Fungible Token (NFT) Explained

The year 2020 saw a massive boom in the Decentralized Finance (DeFi) sector. In 2021, it was time for the Non-Fungible Tokens (NFT). What is an NFT? This article explains the words fungibility and NFT for newbies.

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Fungibility explained

The abbreviation NFT comes from the words Non-Fungible Token. The word fungible might not be familiar for many people. Especially for those, who don’t have English as their mother tongue. Fungible and fungibility are rarely used in daily discussions.

The synonym for fungible is interchangeable. When something is non-fungible, it’s unique. Let’s dive into history to understand why fungibility is so important for money and cryptocurrencies.

Gold and silver were used for exchange in Egypt already 5000 years ago. They were not money, though. This was because each piece of metal was in different sizes and weights containing various amounts of gold or silver.

The solution was the introduction of money in a form of coins. This revolutionized trade, commerce, and the development of mankind about 2500 years ago.

When gold and silver were minted into coins of equal size and weight, fungibility was born. Check the video below if you want to learn more about monetary history.

Fungibility is an essential attribute for money. Not just for coins, but also for bills and digital currencies. Fungibility enables money to be divided into smaller units, which are all interchangeable.

For example, you can change a 20 euro bill for one 10 euro bill and five 2-euro coins. You could also change a 100-euro bill for five 20-euro bills. They would still hold an equal total value.

Fungibility is also present in the digital world with fiat money and cryptocurrencies.

Non-fungible tokens vs other cryptocurrencies

All normal cryptocurrencies are fungible. One bitcoin in my wallet has equal value with one bitcoin in my friend’s wallet. If you owe one bitcoin to your friend, you can also send him five payments of 0.20 BTC each.

The previously described feature is true to a certain extent. Since this article is a guide for newbies, we don’t go deeper into the subject of “dirty bitcoins”. You can search more of that from Google.

To keep things simple between “fungible” and “non-fungible”, let’s just say all normal cryptocurrencies are always interchangeable between each other.

In the beginning, you could only create fungible cryptocurrencies. All standard cryptocurrencies are also mined or created into existence with this feature. How does a non-fungible token differ from a fungible coin, then?

The predecessor of NFT was an idea called colored coins. It was introduced already in 2012. You can read more of the history of NFTs from here.

The concept of a non-fungible token didn’t hit the mainstream until late 2017. That is when CryptoKitties online game became hugely popular. It clogged the entire Ethereum network due to increased transaction amounts.

CryptoKitties 2020

The game still exists, and every crypto kitty is, in fact, an NFT. This is also when the Ethereum ERC721 standard was born. It provides a framework and rule set for creating NFTs.

Many readers might know ERC20, which is the standard for normal (fungible) tokens.

A non-fungible token is like a standard token with steroids. It has the same basic features as a fungible token: it is 100% digital, it can be sent to anyone, and it can be stored in a cryptocurrency wallet. Non-fungible tokens can be also traded on exchanges like standard tokens.

One major difference is that a non-fungible token cannot be divided into smaller pieces. You will soon understand why, when we’ll go to NFT use cases.

When we talk about a non-fungible token, it’s critical that one can be sure of its uniqueness. It has to be also verifiable that the number of NFTs is limited. This is why blockchain is so useful. Each token and its supply can be verified at any time.

The next development stage is already here and that’s called the ERC1155 standard. It will make the NFT creation process much faster, simpler, and more efficient. Check this article, if you want to read more about the differences between ERC721 and ERC1155.

NFTs and gaming

A good example of a non-fungible token in an analog world would be a piece of art or a collectible. In the digital world, there are some cool features available.

If you buy a special limited edition item, how do you know it actually is one? How do you know that a certain amount of items exists? This is where blockchain benefits arise.

Not only can blockchain show the amount and uniqueness of each token, but you can also verify who owns it. It is also easy to transfer the ownership of a token from one person to another. Think about a digital ticket to a sporting event or concert, which could be created using non-fungible tokens.

The previously mentioned CryptoKitties is a game that brought the NFT concept to the mainstream. That is not the only blockchain game where NFTs are being used. The most popular ones are Decentraland and Gods Unchained.

Watch the video below if you want to learn more about Gods Unchained.

Decentraland is a virtual world, where players can purchase land. Gods Unchained is a digital board/card game, where each card has unique strengths, just like in Pokemon.

Those interested in football cards should check a game called Sorare.

Some readers might be familiar with World of Warcraft or similar adventure games. Here you could use the NFT technology on weapons and other in-game items. If you want to stop playing, you could sell your items on an NFT marketplace.

It will be possible to transfer NFT-built game items from one version of the game to another. This would open endless possibilities in the gaming world. NFT technology and games really do fit together. If you are interested in this subject, check also Enjin, which might be a big hit in 2021.

You can buy Decentraland’s MANA token or Enjin’s ENJ coin from Binance.

More NFT use cases

NFTs and games fit very well together, as mentioned earlier. There is also one other use case for non-fungible tokens: digital art. There are already online marketplaces for art-NFTs.

The best known of such sites is Rarible (see the image below). This application has also its native token, RARI.

rarible

Open Sea is another popular marketplace for crypto collectibles.

NFT has a connection to the DeFi market as well. When the price discovery mechanisms improve, it will be possible to use NFT items as collateral on DeFi loan platforms like Aave.

Aave founder Stani Kulechov made the following tweet in June 2021.

Digital art is not the only use case besides gaming. There are also crypto domains (.eth and .crypto), where NFT technology is being used. These domains allow you to send funds to a person using an address like satoshinakamoto.crypto or vitalikbuterin.eth.

There is also the entire financial sector, which has endless use cases for NFTs. The words digitalization and tokenization are often mentioned. In the future, you’ll be able to invest in Apple stock by buying an NFT token instead. You will be also able to tokenize your financial assets.

The Mona Lisa example

The concept of digital art is a difficult one to understand. How can anything digital be non-fungible or scarce?

The famous Mona Lisa painting is a great example of uniqueness. It’s hanging on the wall of the Louvre, and it was painted by Leonardo Da Vinci. The painting is priceless and extremely well protected.

There are no doubts over the fact of where the real Mona Lisa is.

European art banner Mona Lisa

If we have digital art, like a video or a painting, anyone can download it and just enjoy the art from their own computer. Hence, the argument is, that NFTs can’t have any value because they can be copied so easily.

First of all, you can do the same thing with Mona Lisa. Buy a poster from Louvre’s gift shop or take a photo with your own camera. Hang that picture on your wall and enjoy the work of Leonardo Da Vinci every day.

You could also hire an artist to make a copy. He could use a similar canvas, a similar frame, etc. As long as there has been art, there have been forgeries. Many of them are so well done, even professionals can’t tell a difference.

There is one important point in all this. You know that your Mona Lisa is fake.

This means you have no proof of authenticity. If you’d ever want to sell your painting, you couldn’t prove it’s the one and only Mona Lisa. Just because it looks like Mona Lisa, it doesn’t mean people would pay millions of dollars for it.

This is why NFT art can be valuable. The blockchain proves you have the original piece. The blockchain shows the history and the current owner of each token. You know you got the original one and so does everyone else.

Both digital and analog art can be copied. Lots of forgeries are being sold in the art industry. There are also fake gold and silver bars with copper inside them. Anything can be counterfeited. What counts is the proof of authenticity and ownership.

If someone wants to enjoy copied digital NFTs or a fake Mona Lisa, there is nothing we do about that. However, this person would have nothing of value.

The future of non-fungible tokens

NFT is a buzzword, which we’ve seen being used for a couple of years already. Many analysts expected NFT to become “a thing” already in 2018-2019. This never really happened.

However, the rise of DeFi has given a big boost to the NFT market. Now it’s almost impossible to browse social media for one day without seeing a post or tweet about NFTs. It’s also obvious that NFT and DeFi are connected in many ways.

A good example is Aavegotchi, which is an NFT project built by the DeFi lending platform Aave.

Investors are always looking for the next sector to boom, which would provide up to 100x profits for early birds. DeFi has given 10x, 20x, 50x, and even 100x profits for smart investors, who bought these unknown tokens in 2019.

It was difficult to invest in DeFi in 2019 since there was truly little information available. Big exchanges didn’t list many of the DeFi tokens either. Even in the spring of 2020, you had to use decentralized exchanges (like Uniswap) to purchase promising coins.

The NFT market looks just like the DeFi market was in mid-2019. The market size is tiny, and many of the most promising NFT projects aren’t listed in the big crypto exchanges yet. It might be that NFT will do in 2021-2022 what DeFi did in 2020.

We have already seen an NFT artwork sell for 69 million dollars.

The good thing is that non-fungible tokens are easy to store. You can use a web 3 wallet like MetaMask. Trustwallet and Enjin wallet are also popular storages for crypto collectibles.

Check the video below for more NFT investing ideas.

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